THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

(BEGIN VIDEOTAPE)

KING: Pressing global and national security challenges for President Obama as he travels across Asia.

AXELROD: He is determined to get Afghanistan right.

KING: The president's top adviser, David Axelrod, joins me from Singapore.

A firestorm over the decision to try suspected 9/11 terrorists in federal court in New York City. We'll get perspective from the man defined by those attacks, former Mayor Rudy Giuliani.

And crunching the numbers on the economy and health care. Perspective from two of the Senate's top deficit hawks, Democrat Kent Conrad of North Dakota and Republican Judd Gregg of New Hampshire.

And our "American Dispatch" from Wasilla, Alaska. It's Sarah Palin's hometown. Her new book "Going Rogue" is reigniting an old political divide.

This is the "State of the Union" report for Sunday, November 15th.

(END VIDEOTAPE)

KING: We begin this Sunday with a president whose passport is getting almost as crowded with stamps as his inbox is crowded with controversial policy decisions. Barack Obama is shattering the record for first-year presidential travel. At the moment, he is in Asia, attending the annual Asian-Pacific Economic Summit. By the time he's done with his trip to Japan, Singapore, China, and South Korea, Mr. Obama will have visited 19 countries in his first 10 months in office, plus the Holy See to call on Pope Benedict. One instant lesson, the big debates back home follow presidents around the world, and one of the biggest at the moment, a decision to try five top 9/11 terror suspects in federal court, not the military justice system, is where we begin our conversation with the president's closest adviser, David Axelrod.

(BEGIN VIDEOTAPE)

KING: Let's begin with the controversial decision to try Khalid Shaikh Mohammed and four other 9/11 alleged conspirators in the federal courts in New York City, just a short walk from the site of the twin towers collapsing. Many Republicans are criticizing this, but it's not just Republicans. This is Jim Webb, Democratic senator from Virginia who says, "they do not belong in our country, they do not belong in our courts, and they do not belong in our prisons." Why, David Axelrod, did the administration decide to take this step?

AXELROD: Well, I think for the same reason that Mayor Bloomberg and others felt strongly that we should.

We believe that these folks should be tried in New York City, as you say, near where their heinous acts were conducted, in full view in our court system, which we believe in.

We've had, you know, since 2001, have had 195 terrorism cases in the courts, and we've been successful 91 percent of the time. We're very confident about these cases, and we believe this is the appropriate thing to do.

This is a judgment the attorney general made in concert with the secretary of defense. As you know, there were five other cases that were sent to military commissions, but we feel strongly that justice will be done here.

And frankly it's been a long time in coming. A lot of these cases have been delayed for many, many years. And now, the people who suffered so much in that attack will get the justice they deserve.

KING: We will have later in the program the former New York City Mayor Rudy Giuliani, who of course was the mayor when the horrible tragedy of 9/11 took place. And he is among those who say, to him, this reflects returning to a pre-9/11 mentality of treating terrorism as a crime, not an act of war. How would you answer that?

AXELROD: You know, it is odd, because when the 20th 9/11 bomber was tried in Virginia, in a civilian court, and convicted, Mayor Giuliani testified in that case and he heralded the outcome. So he may have changed his view, but we haven't changed ours.

KING: You mentioned this was the attorney general's decision. How involved was the president of the United States?

AXELROD: Well, the president was informed of the attorney general's decision and his reasoning for the decision. This was a decision for the attorney general to make, in concert with the secretary of defense. KING: It is a reminder bringing these terrorists to New York City for trial, alleged terrorists, a reminder of the controversy about Guantanamo Bay, Cuba. We are just now two months and one week away from this promise from the president of the United States.

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: Guantanamo will be closed no later than one year from now.

(END VIDEO CLIP) KING: If you talk, David Axelrod, to top officials at the Pentagon, top officials at the building you work at, in the White House, they say now it is a near impossibility that that deadline will be kept. When will Gitmo be closed?

AXELROD: We believe we are going to substantially meet the deadline. We may not hit it on the date, but we will close Guantanamo. And we are making good progress toward doing that.

KING: Any idea? Two months, four months, six months more?

AXELROD: I'm not going to put a deadline on it, John. But we are going to get it done. We are moving toward getting it done in all the different dimensions that are necessary to get it done. The president believes it is important to get it done and to end this chapter in our history. And we are going to get it done.

KING: Part of this chapter in our history is the 9/11 attacks, which, of course, were hatched in Afghanistan. And the president is closer to making this big decision he has to make about how many troops. When he makes that decision, will he lay out for the American people not only the rationale for the decision he has made, but an exit strategy for Afghanistan? If you travel the country as I do all the time, people keep saying, eight years later, how long is it going to take? How much is it going to cost? How many lives will be lost? Will the president give us an exit strategy?

AXELROD: Well, I think that is a concern. And it is obviously one of the factors the president is thinking through. We have been there for eight years; it is a long, long time. And we have to keep focused on what our purpose was in the first place. Our purpose was to disrupt and dismantle and destroy Al Qaeda. That remains our purpose.

But obviously we can not make an open-ended commitment. And we want to do this in a way that maximizes our efforts against Al Qaeda, but within the framework of bringing out troops home at some point. And the president has made that clear in all these discussions. There has to be a framework to this decision.

But we are getting close. It has been a good process.

KING: As you know, conservatives have been critical of the president's policy review, saying, why is it taking so long? The former Massachusetts governor and Republican presidential candidate, Mitt Romney gave a speech this weekend in which he said, not only why is it taking so long for the president to decide, but he also said, why is David Axelrod, his top political adviser, involved in these deliberations? Let's listen.

(BEGIN VIDEO CLIP)

MIT ROMNEY, (R-MA,) FMR. PRESIDENTIAL CANDIDATE: I find it incomprehensible and inexcusable that this president invites David Axelrod into national security meetings. Polls and politics have no place at that table. He is the commander in chief. What has he been doing? Do you realize he carried out more than 30 campaign visits in this last season, for various Democrats? While he can't make up his mind on Afghanistan, or have enough time to meet with generals, he is out there campaigning.

(END VIDEO CLIP)

KING: Let's take them in order. Why does David Axelrod deserve a seat at that table? And why is it taking so long?

AXELROD: Well, first of all, let's be clear. David Axelrod does not have a seat at that table. I have observed these discussions because, as I am today, I have to help communicate the message of the administration. And so it is helpful for me to hear. I have not said a word in any of those meetings.

Now let's take the second part. Governor Romney has to choose one argument or another. Either he has to say he is not paying attention or he has to say he is taking too long because he has been involved in a rigorous review.

The president has had hours and hours and hours of meetings with his military commanders, with his national security team, to run through every aspect of this, in order to get it right. And we've seen in the past what happens when we don't do that; when we don't do the necessary preparations. And he is determined to get Afghanistan right. It is something that Secretary Gates supports. It is something that the chairman of the Joint Chiefs of Staff supports. General McChrystal has been supportive of this process.

And, you know, I know that Governor Romney has never had responsibility for any decision akin to this, and so he just may not be familiar with all that it entails. But I think the American people are being well served by a process that is assiduous and in which every aspect of this is considered. Because, after all, lives of American servicemen are involved here. An enormous investment on the part of the American people. We ought to get it right.

(END VIDEOTAPE)

KING: A quick break. When we come back, we'll continue our conversation with senior presidential adviser, David Axelrod, about how the abortion debate is complicating the politics of health care, and whether he and the president will buy a copy of Sarah Palin's new book.

(COMMERCIAL BREAK)

KING: Let's get right back now to my conversation with senior presidential adviser David Axelrod.

(BEGIN VIDEOTAPE)

KING: Let's close with a few questions on domestic issues, health care first. As you know, there's a big controversy within the Democratic Party. Abortion opponents put language in the House legislation, they believe that will stay in the Senate legislation, that denies any federal funding, not only in the public option, but in this insurance exchange, no federal subsidies could go to pay for insurance coverage.

And abortion rights Democrats are furious at this, and they want the president's help. Was the president comfortable signing a health care legislation that has the Stupak amendment in it?

AXELROD: Well, the president has said repeatedly, and he said in his speech to Congress that he doesn't believe that this bill should change the status quo as it relates to the issue of abortion. This shouldn't be a debate about abortion. And he's going to work with Senate and the House to try and insure that at the end of the day, the status quo is not changed.

KING: Does the Stupak amendment change the status quo?

AXELROD: Well, I think it's fair to say that the bill Congress passed does change the status quo. And -- but I believe that there are discussions ongoing to how to adjust it accordingly.

KING: The president has said he wants the public option, but he wouldn't hold up the health care debate for the public option. That he would like it in there, but if the bill came to him without one that met his other criteria, that would be OK with him.

How about on this one? If the Stupak language is in the bill and you think it changes the status quo, would the president veto it and send it back, or would he reluctantly sign it?

AXELROD: John, I would have to take issue with your premise. I don't think the president has said that one way or the other what his posture would be. He said that this is an aspect -- the public option debate is an aspect of a larger bill. This is an aspect of a larger bill. He has been very careful not to draw these lines. But he believes both these issues can and will be worked through before it reaches his desk.

KING: Members of the Hispanic Caucus came to the White House. They're worried the Senate language would not only say that no federal money would go to have an illegal immigrant -- help an illegal immigrant get health care, but that the Senate language would prohibit an illegal immigrant from using his or her own money to purchase health insurance. Would the president support that?

AXELROD: Well, the issue has to do with the health insurance exchange that's being set up. And again, this is another issue that has to be worked through. Ultimately, the issue of undocumented workers is something that needs to be dealt with in a larger context.

You know, we're not going to settle all of these issues in the context of a health care bill. And it would be tragic if these debates took us to a place where we missed the opportunity to do something that we've been talking about for 100 years and deal with the flaws in our health insurance system. KING: You sure you'll get it done this year?

AXELROD: Well, that's our goal and that's our intention and we're going to push very hard to get it done. There has been a long, vigorous, thorough debate and it's time to get it done. And, you know, for all of those people who have pre-existing conditions and can't get coverage today, for all of the people who can't afford coverage because they don't get it through their employer, for all of the people who have coverage and have seen their costs escalate exponentially, they can't wait for resolution. We ought to get this done.

KING: The secretary of homeland security, Janet Napolitano, says you will, early next year, come forward with a plan for comprehensive immigration reform that would have a plan in it, a path in it for an estimated 12 million illegal immigrants in this country to have a pathway to status -- to legal status. Will you make the political commitment that no matter what the politics of January and February, the administration will go forward with this early next year?

AXELROD: John, what the president has said is, and he said it to both Republicans and Democratic members of Congress who have worked on this issue is, come to him, let's come together around something that both parties, or at least elements of both parties say they can agree on, so we don't reach the same impasse we've reached before and then he'll be willing to go forward on it.

I think some good work is being done on both sides of the aisle to achieve that. And Secretary Napolitano is getting that done. But what we want is a system that holds everybody responsible and everyone accountable.

We have to have better security at our borders and we are developing that, thanks to Secretary Napolitano. We have to have better enforcement on employers who abuse the system by hiring undocumented workers in order to undercut the labor market. And we have to hold accountable and responsible the 12 million people who are here illegally. And they have to pay a fine and a penalty and have to meet certain requirements in order to get in the line to earn citizenship. And if they don't want to do that, they need to leave.

And that is the president's position. If we can get a group together to give it the momentum to pass in Congress, then we're going to push forward with it.

KING: Let me close with a question about a political debate back here in the States while you're in Asia. And that is Sarah Palin's book, "Going Rogue," is coming out on Tuesday. Your friend and partner from the campaign, David Plouffe, says he's very eager to buy one and give it a good read to see what she says about the campaign and about herself.

How about David Axelrod? It sounds like a perfect read for that long flight home from Asia.

AXELROD: Yes, you know, I think I'll borrow Plouffe's copy. I don't see why we both have to buy one. So I will -- once he's done with it, maybe he can summarize it for me or lend it to me and I'll give it a look. I'm more interested in seeing people buy his book. I think that's a great read.

KING: How about the president, do you think he wants to read Sarah Palin's book?

AXELROD: I think the president's pretty busy right now. I don't know that that's on his immediate reading list. He is reading reams of papers related to the many issues that he has to confront. So I'm not sure that will be at the top of his list right now.

KING: David Axelrod, joining us from Singapore as part of a long trip across Asia, we appreciate your time.

AXELROD: Great to be with you, John. Thank you.

(END VIDEOTAPE)

KING: Up next, the man who became a national icon for his response to the 9/11 attacks, former New York City Mayor Rudy Giuliani, who says the president's decision to bring the alleged architects of the terror plot to trial in New York is a dangerous call.

(COMMERCIAL BREAK)

KING: The administration's decision about how to bring alleged 9/11 mastermind Khalid Shaikh Mohammed and four other alleged conspirators to justice is the subject of fierce legal and political debate.

Some see the decision for trials in federal court as the right call, a transparent process, not far from where the Twin Towers of the World Trade Center once stood. Others, though, are outraged, among them, the man who led New York City that fateful morning, Mayor Rudy Giuliani.

Mr. Mayor, thank you for joining us.

GIULIANI: Thank you very much, John.

KING: You say this is the wrong call. The White House has gone back and said, wait a minute, he testified at the Moussaoui trial, and he said, among other things, quote, "I was in awe of our system. It does demonstrate that we can give people a fair trial, that we are exactly as we say we are. We are a nation of law. I think he's going to be a symbol of American justice. If it was right for Mr. Moussaoui, why it is wrong now?

GIULIANI: Well, the reality is, we can be an example to everyone. And a military tribunal is certainly fair. It's a great example to the rest of the world. The tradition for over 150 years has been to use those military tribunals. They were good enough for Abraham Lincoln, Franklin Roosevelt in many, many cases. And in fact, the really strange thing about this decision is five of these terrorists are going to be tried in military tribunals anyway. So the reality is, this is an unnecessary -- first of all, it's an unnecessary advantage to give to the terrorists. I don't know why you want to give terrorists advantages.

And secondly, it's an unnecessary risk to the city of New York, which already has any number of risks. If it was necessary; if this were the only option, well, of course I'd be in favor of it, and of course the city would do everything it could, as it will, to try and make it safe.

KING: Well, the administration says those five going to military tribunals committed acts overseas against U.S. interests, and these that are going to go to trial in New York committed -- planned an attack, of course, here in the United States.

I want to go back to something else you said. Because I'm trying to make the distinction of things you've said in the past to where we are now. In 1993, you said at the World Trade Center trials in New York, "It should show that our legal system is the most mature legal system in the history of the world, that it works well, that it is the place to seek vindication if you feel your rights have been violated."

The political question is, you know, what the White House is saying, well, Rudy Giuliani said, when Bill Clinton was president, a trial was OK. When George W. Bush was president, a trial was OK. But now that Barack Obama is president, it's not.

GIULIANI: Well, that's a -- that's an absolutely silly distinction that they're making. A trial is OK. A military trial is OK. In the case of the World Trade Center under Bill Clinton, I've already said, in retrospect, as many have, that that was a mistake. To treat the 1993 bombing as if it were just a criminal act, just one of the 1,973 murders in the city of New York that year, was a big mistake.

So what -- basically, the Obama administration is repeating the mistake of history. Many, many people have regarding that as a mistake, that it was treated just as a civilian act. It should have been treated as an act of war.

And it's part of a bigger picture here, John. It's part of -- it's part of Barack Obama deciding that we're not at war with terrorism any longer.

So this is now treated as if it was an act of war, which it should be treated like. Remember, he's told us we can't use the term "war on terror." The only problem with that, John, is the terrorists haven't stopped going to war with us. Maybe the Obama administration doesn't think we're at war with them, but they are very clear on the fact that they are at war with us.

So for many, many reasons, including the symbolic reasons, this should be tried in a military court, as an indication that we have learned, since 1993, after the attack on the World Trade Center, after the attacks in Africa, after the attack on the USS Cole after the attack on the World Trade Center, gosh, you'd think we'd learn that we're at war.

KING: I want to show you the front page, here -- I'm showing the New York Post today, the Sunday Post. "Under Siege" is one of the headlines, "Massive New York City Lockdown for 9/11 Trial."

You were the mayor of the city on that fateful day. Your voice was one of comfort to the people of New York City in the days and weeks after the attack. Do you think holding this trial there puts the people of New York City at risk?

GIULIANI: Well, I think...

(LAUGHTER) ... yes, of course it does. I remember when the African bombers were brought to New York when I was mayor of New York City. I was briefed on all of the additional risk that that would create for New York City.

That's when I had to close areas around the federal courthouse and I had to close areas around city hall, for which I was severely criticized by the New York Times for making those closures, as if I wanted to keep people out of city hall. I did it on the advice of the FBI and the New York City Police Department because of the additional risk to city hall that was going to be created by the -- by the terrorists that were going to be tried in New York City. This would be in the late 1990s, preceding September 11.

So anyone that tells you that this doesn't create additional security problems, of course, isn't telling you the truth. And the best indication of it is, just look at the additional security that's going to be employed when this happens. That also happens to cause millions and millions and millions of dollars, all of which would be worth it if there was no other choice.

There is another choice. The choice is going to be utilized with regard to other terrorists, meaning military tribunals. It's the more appropriate choice with regard to a recognition that we are at war with Islamic terrorists, something the Obama administration refuses to say.

He said this, "It is fitting that 9/11 suspects face justice near the World Trade Center site where so many New Yorkers were murdered. The NYPD is the best police department in the world and it has experience dealing with high-profile terrorism suspects and any logistical issues that may come up degree the trials."

Mike Bloomberg seems to think this is a good thing, that it's fitting.

GIULIANI: Well, we have a difference of opinion on this. I -- I agree completely with Mayor Bloomberg that this is the greatest police department in the world. And as I said, if it has to be tested, let's test it. But let's not add additional burdens to this.

And, of course, you can't deny it's going to create additional burdens. Because, as soon as we see these people deployed, we're going to see additional security. And it's going to cost millions and millions of dollars.

But beyond the risk to New York, I'm concerned about this fact that we no longer believe that we're at war with Islamic terrorists when they're at war with us. I see this whole decision-making as part of a piece with the failure to recognize the acts of Major Hasan as acts of Islamic terrorism, the failure to -- to really make a decision quickly on Afghanistan. My gosh, we've been waiting 2 1/2 months to make a military decision that you would think President Obama would be ready to make. I mean, after all, he criticized President Bush for not paying enough attention to Afghanistan. If it's taking him 2 1/2 months to develop a military strategy for a war that's been doing on for eight years, he can't be paying too much attention to Afghanistan, either.

KING: Well, on that point, the political point you're making there, criticizing the president's delay, I want to show you the cover of Newsweek this week. This is Sarah Palin on the cover, "How do you solve a problem like Sarah? She's bad news for the GOP and for everybody else, too."

(LAUGHTER)

Does Rudy Giuliani, a moderate Republican on social issues, a tough-on-crime Republican on other issues -- do you think Sarah Palin is bad for the Republican Party?

GIULIANI: No, I do not. I think Sarah Palin is great for the Republican Party. I think the fact that Newsweek has her on the cover and is criticizing her is a great indication of how good she is for the Republican Party...

(LAUGHTER)

... and how much enthusiasm -- how much enthusiasm she's created.

GIULIANI: And I took her to the famous game at Yankee Stadium this summer where Letterman got in trouble, making those unfortunate remarks about her daughter, picking the wrong daughter. And she gets a tremendous reception, even here in Democratic New York.

I mean, this is a person who creates great enthusiasm for the party. We're very far away from a 2012 election. Right now, I like figures who are creating interest in the Republican Party. Given the decisions that the Obama administration is making, particularly in this area of terrorism, which concerns me probably more than any other, we're going to need some pretty strong alternatives in 2012.

I don't know if it will be Sarah Palin or someone else, but right now it's developing interest in a Republican Party, and we need a two- party system and we need a healthy one. KING: You say you don't know if it will be her. Might it be you? Some people say Rudy should run for president again. Other people say, please run for governor, Mr. Giuliani. What will you do?

GIULIANI: And other people say, please don't.

(LAUGHTER)

KING: And what's the answer?

GIULIANI: I don't know yet. I don't know what the answer is yet, John.

KING: When do you have to make that decision?

GIULIANI: Not today. not this morning.

KING: Let me ask you lastly about, you say you welcome Sarah Palin, you think she's good for the party. What about what happened in NY-23, where you had a candidate -- a moderate Republican candidate who had the endorsement of the party and then conservatives like Sarah Palin came in and said, no, not good enough, not good enough on taxes, not good enough on life, not good enough on these issues. Is that a good precedent for the party?

GIULIANI: No, that's not a good precedent for the party. And that's the way you can allow Democrats to win, even if the public has turned against them on certain things. I think in that particular case, I know that district. that's a district that is very concerned about Obama's health care. You can see the Democrat has voted against the Obama health care program. That's a district where we could elect a Republican if we get our act together and let's hope we don't repeat that too often because then we surely won't be a majority party.

KING: So in that case she was bad for the party?

GIULIANI: Well, I don't know if she was. You have to understand about the Republican candidate, the Republican candidate wasn't just socially moderate and fiscally conservative. The Republican candidate I would have had trouble with. I mean, she was a candidate that was in favor of the stimulus, a candidate that refused to condemn ACORN, a candidate that was in favor of heavy spending.

So there was a lot of trouble there. That was just like a wrong decision that a lot of people participated in.

KING: Mayor Rudy Giuliani, we appreciate your time today and I will say this since this is the first time I've had the opportunity, very hard for a Red Sox fan, congratulations to your Yankees. Keep us posted on your plans and we'll see you in the near future.

GIULIANI: Thank you very much.

KING: Take care, Mr. Mayor.

GIULIANI: Thank you.

KING: A trillion dollars over 10 years for health care changes, $1 million per soldier per year in Afghanistan. Big political controversies, and big ticket price tags for a federal budget already deep in deficit spending. Is there a way out? Up next, we crunch the numbers with the Senate Budget Committee Chairman Kent Conrad and the panel's top Republican, Judd Gregg.

(COMMERCIAL BREAK)

KING: Reversing a 10.2 percent unemployment rate that's heading higher, reforming health care, those are the two biggest domestic challenges facing the Obama White House and the Congress. But there's concern about how to pay for such an ambitious agenda when the administration itself projects the federal deficit will reach $1.5 trillion next year.

Joining us to crunch the numbers is the chairman of the Senate Budget Committee, Kent Conrad of North Dakota; and in his home state of New Hampshire, Senator Judd Gregg, the committee's top Republican.

Gentlemen, I want to get to dollars and cents in a moment. But first let's start with terrorism. The president wants to close Guantanamo Bay and one of the proposals when he does that is to move the terrorist detention center perhaps to his home state of Illinois.

Senator Conrad, to you first, is that the right idea, Illinois or elsewhere in the United States, bring them here? CONRAD: You know, this is a very difficult issue, obviously, how you deal with these people. I would prefer to see them dealt with outside the country, but there are circumstances when being here, tried in a court of law, is the best option. So I think different cases are going to be -- have to be handled in a different way.

KING: The long-term imprisonment, would you want Khalid Sheikh Mohammed in a prison in North Dakota?

CONRAD: No, I would not.

KING: Senator Gregg, should they come to the United States?

CONRAD: Well, wait a minute, I don't think Khalid Sheikh Mohammed should be in prison. I think Khalid Sheikh Mohammed ought be put to death. And that's clearly what the administration is saying, the attorney general of the United States is saying he will go for the death penalty against Sheikh Mohammed.

KING: Senator Gregg, do we need -- if we're going to close Guantanamo Bay and we need a place to keep these terror suspects until they are brought to trial, should it be in the States?

GREGG: No. And we shouldn't close Guantanamo for the purposes of these type of terrorists. Basically, we're dealing here with people who have committed acts of war against us. They shouldn't be tried in our criminal justice system. They should be tried in our military justice system. And it's absolutely inexcusable we're not using the military justice system to try these people. That's why we have such a system. And when you're at war with someone, you use that system. And these people are evil people. They represent a cause which wants to destroy this nation. If they have the opportunity and were to get free, they would try to destroy this country. There's no reason we should have them in the critical justice system.

KING: You two disagree on many issues, but you agree on some as well. and you have been, Senator Conrad and Senator Gregg, among those screaming the loudest for some fiscal discipline in Washington.

I want to ask how we get to that. Because the administration says, beginning with the State of the Union Address, they will put a lot of emphasis on bringing down the deficit. On the front page of The New York Times today though, the short-term challenge, high costs weigh on troop debate for Afghan War. One million dollars per soldier per year in Afghanistan.

Senator Conrad, can you balance the budget or get anywhere close to balancing the budget if we're going to send 35,000 more troops to Afghanistan?

CONRAD: You know, security is not cheap and the first judgment has to be, what assures the security of the nation? But in the case of Afghanistan, the cost is $40 billion to $50 billion a year if we're going to put in an additional 35,000 to 40,000 troops. And we have top military leaders saying that's not the direction that's going to keep us more safe. I think you have General Eikenberry, now Ambassador Eikenberry, writing now, we know, a cable to the president, saying, don't send in more troops. and General Eikenberry is a four- star general who is the commander of our troops in Afghanistan before he became a diplomat.

So he's ending a signal that it's the wrong course for America to increase troop levels in Afghanistan.

KING: But Senator Gregg, the general in charge now, Stanley McChrystal, says he needs those troops.

KING: So you have the administration's top commander on the ground and top diplomat on the ground in apparent disagreement.

Where are we heading here?

GREGG: I don't know what we're heading. The president's going to make a decision, I hope sooner rather than later. But the point here that I think is at the essence of your question is, can we afford to fight the war on terror? We can't afford not to fight the war on terror.

The first obligation of a national government is national defense. You spend the money it takes to fund the troops in the field, and that's what you have to do. The bigger issue is -- are these other spending initiatives. You talk about $1 million a year for a soldier in Afghanistan. The bill that just passed the House is $1 billion a page. It's a $2 trillion to $3 trillion bill when it's fully implemented. That's where we have to take a look.

And we've got to stop the spending on the domestic side of the ledger here. We've got to put some restraints on domestic spending so that we can afford this government and so that our kids are passed a government which isn't so indebted that they can't have a decent lifestyle.

KING: Senator Gregg's point there was about the House health care bill. There's a new report out. The authors of the bill in the Congressional Budget Office say this will reduce the deficit over time.

But there's a new report out by a government agency that oversees Medicare that says that House bill would cause significant benefit cuts in the Medicare program the way it is now drawn up, that seniors would have their benefits cut or that hospitals might say, forget about this; I'm not taking Medicare patients anymore. Is that going to happen?

CONRAD: Well, first of all, I think we've got to be very careful about our language. There are no cuts in any of these bills. There are reductions in the increases that they're scheduled to receive.

And in the bills, the reductions are not aimed at Medicare beneficiaries. The savings come from Medicare providers, hospitals, nursing homes and the rest. In the bill that came out of the Finance Committee, those were negotiated savings from those providers. Why would they agree to those savings? They agreed to them because they know, with 30 million people more covered, they're going to get more business.

So most of these savings, at least in the Finance Committee bill, were negotiated. And they were negotiated with the providers. So they're not from beneficiaries.

But beyond that, it's important to know that the Finance Committee bill had $100 billion less in savings because of this concern than is in the -- in the House bill.

KING: Well, as we go look -- as we look at a Senate plan, number one, we're waiting for the Congressional Budget Office to score it, and many are saying, why is it taking so long? Leader Reid sent it in some time ago.

But he also has indicated that he might like, instead of that fee on Cadillac insurance plans, which labor unions have objected to, he might instead look for some sort of a surtax on Medicare payroll tax, higher Medicare payroll tax on wealthy Americans.

Senator Gregg, in terms of the math in the Senate health care plan, which is preferable?

GREGG: Well, the CBO has told us there's only two ways that you can significantly reduce the out-year costs of health care.

We -- I sent them a letter and asked them this question. And in fact, Senator Conrad participated in that. And they came back and they said, the two ways are, one, that you should have high-end insurance policies be taxable so that you discourage overutilization -- and it also creates revenues, and that's the item you're talking about.

And two, they said, we should reward caregivers on the basis of quality rather than quantity. And that's a massive issue, but that's a -- that's a thumbnail description of what they essentially said.

The real issue here isn't whether or not these proposals are deficit-neutral. Because you can get deficit neutrality by making a lot of assumptions which you know aren't going to occur, like the House bill presumes about $1 trillion in Medicare reductions in the rate of growth of Medicare, which we're not going to get. And it assumes over $1 trillion in new taxes, which we're probably not going to get.

The problem is you're growing the government so dramatically by adding this massive new entitlement into the system.

We already have entitlements we can't afford. We have $60 trillion of unfunded liability in the Medicare accounts and the Social Security accounts. Now you're going to put a brand-new entitlement on top of that, that's not going to be fully paid for, that is going to end up massively expanding the size of government.

You're going to take the size of government in this country from 20 percent to around 23 percent to 24 percent of the gross national product after you've fully phased in this health care proposal that came out of the House.

That's simply not affordable. The event -- what that creates is an inevitable spiraling of debt. And as my colleague has said, and he says it so accurately, Senator Conrad, the debt is the threat.

If we continue to add to this debt at the rate we're adding to it, we're going to bankrupt our country. We're headed toward third- class status. I mean, the world is telling us that already, when you look at what's happening with the dollar and when you look at what the Chinese are saying, when you look at what Moody's is saying about our bond rating.

We're in serious trouble in this country because we're just spending too much money and now we're talking about adding another $1 trillion of spending on top of it, or $3 trillion.

KING: Is Leader Reid caving into the labor unions, here?

If you believe, as Senator Gregg does, that the best way to do this is to bend the Cadillac plans... (CROSSTALK)

CONRAD: Senator Gregg and I did write the Congressional Budget Office and asked them, what is the best way to contain costs in the long run?

Senator Gregg has accurately described the answer that we received. I think...

KING: Why would your leader not choose the best way?

CONRAD: Look, there are lots of different views about fairness, about equity, about how best to pay for these provisions.

The one thing I want to respond to with respect to what Senator Gregg said is the debt is the threat. And he and I have a proposal to have a commission, given the power to come up with a plan to comprehensively deal with what we confront as a country. That's critically important.

(CROSSTALK)

KING: Why won't the president say, do it?

CONRAD: Well, you'll have to ask him. But health care...

KING: Can he be serious about the deficit if he won't do what you want, appoint a commission; then you come up with recommendations; an up or down voting in Congress? Here it is, right in front of you. Is he...

CONRAD: I believe very strongly that that is what must be done. We have seen a circumstance where the debt of the country doubled over the last eight years, is going to double again over the next eight if we don't find a different course.

It is absolutely critical for the economic strength of the country that we find a way to get these deficits and debt under control.

KING: Let me ask you both, very quickly. David Axelrod, earlier in the program, said that the abortion language in the House health care bill, which says no federal funding of abortion and no federal funding through the exchange program -- he says the president would like to change that some, and they're working on negotiations.

But do you want it to stay as is, Senator Conrad, as the House bill says, no federal funding; can't get -- if you're in the insurance exchange -- any subsidies at all; no abortion coverage?

CONRAD: What is clear is, at the end of the day, for this bill to be successful, that there cannot be taxpayer funding of abortion. Now, whether the House formula has got it quite right or not, that's open to debate. But what is clear is, to have legislation passed -- it was clear in the house; it will be clear in the Senate -- there cannot be taxpayer funding of abortion. But let me go back to a point that Judd made as well. Look, health care is important. It is absolutely important that we reduce the costs. Otherwise we're going to bankrupt families, businesses, and the government itself. So health care reform is critical.

KING: As the debate goes on, gentleman, we'll invite you both back again. We like having you in. Senator Judd Gregg from New Hampshire, Kent Conrad with me, right here. Gentlemen, thank you both.

And up next, we take you to Wasilla, Alaska. In Sarah Palin's hometown, "Going Rogue," her new book is ginning up business for book stores and reigniting the debate over whether she is ready for the highest office in the land.

(COMMERCIAL BREAK)

KING: Unless you've been hiding somewhere, you know there's a big book out on Tuesday from Sarah Palin, the former vice presidential candidate, of course, and the former governor Alaska. Sarah Palin's book comes out on Tuesday, reigniting the debate. Some people love her in part because they remember this from the Republican National Convention.

(BEGIN VIDEO CLIP)

PALIN: Living most of my life in a small town. I was just your average hockey mom and signed up for the PTA. I love those hockey moms. You know they say the difference between a hockey mom...

(END VIDEO CLIP)

KING: A lot of supporters because of that speech there. But a lot of critics because of interviews like this.

(BEGIN VIDEO CLIP)

KATIE COURIC, CBS ANCHOR: ... positions do you disagree with?

PALIN: Well, let's see, there's -- of course...

(END VIDEO CLIP)

KING: So in our "American Dispatch" this week, we went to her hometown, Wasilla, Alaska. And you go there and you see proof, the locals, no matter what they think of her qualifications, are very interested in this new chapter.

(BEGIN VIDEOTAPE)

KING (voice-over): Wasilla's famous resident lives across this shimmering lake. Her image, still a smiling life-sized calling card at the local Chamber of Commerce. It's mostly back to normal a year after the big election, but to visit Pandemonium Booksellers is to be reminded that Wasilla, like the rest of America, is preparing for the next installment of the Sarah Palin debate. SHANNON CULLIP, OWNER, PANDEMONIUM BOOKSELLERS & CAFE: I think it will stir it up a little bit.

CULLIP: It's either one extreme or the other I would say. People either completely, completely have her on a pedestal or don't like her. It's not too much in the middle.

You will have just some people just oh, she's just such an amazing woman, I can't believe what she has accomplished, and that sort of thing, and...

KING (on camera): And the flip side, those who...

CULLIP: The flip side, oh, I can't stand her.

KING (voice-over): Palin's fast political rise has been good for business here. Books on her tenure as governor are in the Alaska section and other political titles sell more now, too.

CULLIP: I have a little bit of everything. You know, I have "The Audacity of Hope." We have -- and during the election you would find that people bought both. You know, they were comparing.

KING: Palin calendars are a big seller at the moment. And post- election political sales tend to reflect Wasilla's more conservative leanings.

(on camera): So Glenn Beck outsells President Obama at the moment?

CULLIP: Oh, yes, big time.

KING: Oh, yes?

GOV. SEAN PARNELL, R-ALASKA: The governor's office is down that end of the hall.

KING (voice-over): This was Governor Palin's Anchorage office until she abruptly resigned in July. As new Governor Sean Parnell tries to make his own mark, he, like everyone else in Alaska, is waiting for the next Palin chapter.

PARNELL: I can really say nothing except that I wish her the best because she treated me and her fellow Alaskans so well, and looked out for us well.

KING (on camera): Do you as governor pick up the phone at all and say, you know, hm, this is a tough one, let me seek her advice or have you both sort of moved on?

PARNELL: I mean, we keep in touch just on a personal basis. I haven't -- we haven't had the policy consults or anything, but we do keep in touch.

KING: Are you going to read the book?

PARNELL: Of course, I'm going to read the book.

(LAUGHTER)

SEN. MARK BEGICH, D-ALASKA: And when I come back here, like, I can...

KING (voice-over): Not everyone here is a Palin fan, of course. Democratic Senator Mark Begich among those who choose their words carefully.

BEGICH: I don't know what her future is going to be. I'll let the public make that decision.

KING (on camera): Are you going to read the book?

BEGICH: I don't know. You know, I have got so many other -- I've got a health care bill to read.

KING (voice-over): Fireside Books is in Palmer, a short drive from Wasilla. It will be open three hours early on Tuesday.

DAVID CHEEZEM, OWNER, FIRESIDE BOOKS: I expect people will be lining up and knocking on the door. Sarah Palin fans are not the most patient people in the world. They want it now.

KING: Owner David Cheezem is a Democrat and thought he had a chance at winning a race for the statehouse last year.

CHEEZEM: The thought was, well, you know the Republicans aren't that excited about John McCain, I might be able to get some -- some votes here where otherwise I wouldn't. And then she came in and ran for vice president and at that point there's just no way, and I lost dramatically.

KING (on camera): You don't seem to hold it against her too much.

CHEEZEM: No, no, not if she sells a bunch of books here.

KING (voice-over): Proof that all politics is local, even as the debate about Sarah Palin's national ambitions opens its next chapter.

(END VIDEOTAPE)

KING: Even in Wasilla, not much middle ground in the Palin debate. As you know, one of our goals is to get out of Washington as often as we can. We've made it our pledge on STATE OF THE UNION to travel to all 50 states in our first year. So far, 44 weeks, 44 states, including Montana, Tennessee, and Michigan. Check out cnn.com/stateoftheunion where you can see what we learned when we visited your community.

(COMMERCIAL BREAK)

KING: I'm John King and this is STATE OF THE UNION.

(BEGIN VIDEOTAPE)

KING (voice-over): After nearly 30 years on CNN, controversial anchor Lou Dobbs steps down. Does his advocacy journalism have a place in television news?

Plus, Sarah Palin begins a media blitz to promote her new book. The former Alaska governor offers stinging criticism of the media.

In this hour of STATE OF THE UNION, Howard Kurtz, as always, breaks it down with his "RELIABLE SOURCES."